Tuesday, October 14, 2014

I'm an Uber user, its a great service outside of cities with decent public transport. But I have been thinking about where they will justify the $17bn valuation and give people a return on that $1.2bn investment. At the same time I've been following the autonomous car pieces with interest and I think there is a pretty clear way this can end, especially as Uber have already said they are going to buy 2,500 Google cars.

If Uber do push local taxi firms to the wall leveraging that huge cash pile then it gives them a great 'front-window' in terms of the services they offer. Now a the moment part of the beauty of the model is that they don't need to pay benefits to the drivers. But what if you could get rid of the drivers? Suddenly it made me think of the net impact of this. Firstly with a driverless bus you could look at ad-hoc public transport style pricing. Change the app so you put in where you are and where you want to go to and Uber can start ride-sharing to maximise utilisation of larger vehicles. This reduces the cost to the consumer and also increases the profitability. It also would put Uber into direct competition with the public transport systems in many countries, again leveraging that $1.2bn war chest to initially under-price and building on the political climates in some countries that see private transportation as the best way to go.

This all leaves Uber drivers being squeezed out. Right now Uber take a 20% cut, but don't have the risk around the driver and the car. But with electric autonomous vehicles much of that risk is going to be reduced which enables Uber to start offering UberAuto where they use some of that war chest to buy electric autonomous vehicles and have them compete in the UberX type of market, potentially directly with Uber X drivers or at a lower price as Uber could take the full revenue from the fare. A franchise model where people buy 'official' Uber autonomous vehicles and have them added to the pool would spread the risk but essentially change the model away from human drivers.

To get this position of strength though what Uber really needs today is to push taxi firms out of the way so they are see as the obvious first place to get a ride in a city. They are already doing that with their pricing, and having that $1.2bn means they are far from being a little startup company. They are a leveraged market approach where the war chest gives them the ability to out compete local competitors. Uber are doing this by leveraging cheap (to them) labour from the 'shared economy', or in reality are creating a business based around zero hours contracts and no benefits.

Longer term though its hard to see why Uber would keep sticking with people as autonomous vehicles become more cost effective. By cutting out drivers they reduce a degree of risk and also increase the share of revenue that they can take. Uber are clearly thinking this way with the purchase of the Google cars and its something we can expect to see increase over time. This shift will bring Uber into the local public transport market where it can provide more flexible routing (at a price) than traditional bus and train services, but still provide a degree of cost sharing. The 101 in San Francisco would be a great example of a profitable 'bus' route for Uber where people are dropped and picked up from home and work but where 80%+ of the journey is shared.

When looking at Uber lots of people talk about the 'sharing economy' but my prediction is the future of Uber is as an autonomous vehicle fleet, the sharing economy (and that war chest) just positions it ready for that future and helps remove some of the competition so its a clearer market when the shift happens.